20 years of accurate predictions on China and the world economy
实事求是 - seek truth from facts, Chinese saying originally from the Han dynasty

12 April 2014

China is now the world's main trade locomotive

China has overtaken the United States to become the world's largest goods trading nation. Indeed, since the beginning of the international financial crisis, increases in China's merchandise trade have been larger than those of the United States, EU and Japan combined.

Even last year, well after recovery from the trough of the "Great Recession," China's trade increase was bigger than that of any other economic centre. In particular China's increase in imports remained larger than the combined total of the United States, EU and Japan - a key issue for other economies.

This change in global trade has major implications for other countries' trade strategies and for ongoing trade negotiations such as the Regional Comprehensive Economic Partnership Agreement (RCEP) and the Trans-Pacific Partnership (TPP).

The scale of the changes in global trade that have taken place since the beginning of the international financial crisis is shown in Figure 1. This illustrates the increases in the total trade of China, the United States, the EU and Japan between 2007, the last year before the crisis, and the end of 2013.

China's total merchandise trade in 2013 was $1,986 billion larger than in 2007 - China's exports having increased by $992 billion and imports by $994 billion. In comparison, the increase in the US goods trade was $741 billion, the EU $1,024 billion, and Japan $214 billion.

Therefore, not only was the expansion of China's trade almost twice that of any other major economic centre, but it was larger than the $1,979 billion for the United States, the EU and Japan put together.

Figure 1

Taking just a bilateral comparison with the United States, which is important for ongoing trade negotiations, in 2007 China's $2.2 trillion total merchandise trade was only 69 per cent of the United States. By 2013 China's merchandise trade, at $4.2 trillion, was 7 per cent bigger than the United States' $3.9 trillion. In six years China's trade increased by almost $2.0 trillion, compared to a US increase of $0.7 trillion - China's trade grew almost three times as much as the United States.

The change was even more dramatic for imports. In 2013 China's goods imports were $993 billion above their 2007 level, whereas US imports were up by $311 billion, the EU's by $329 billion, and Japan's by $212 billion. China's imports rose by more than three times as much as the United States - and by more than the United States, EU and Japan combined. China was therefore, by a huge margin, the most rapidly expanding market for other countries' exports.

Nor has this import situation altered since the Great Recession. Figure 2 shows that OECD data confirm that last year China's imports rose by $132 billion, compared to a rise of $30 billion for the EU - and falls of $8 billion for the US and $53 billion for Japan. China's imports rose four times as much as the EU, while the United States and Japan were declining import markets.

Figure 2

Such trends clearly have major implications for world commerce and ongoing trade negotiations.

First, the attempt by the United States to re-raise the question of the RMB's exchange rate was unfounded. On April 8, under a headline "US warns China after renminbi depreciation," the Financial Times carried an off-the-record briefing by a "senior [US] Treasury official." This reported a 2.5 per cent depreciation of the RMB since its peak earlier this year - a relatively small adjustment, clearly primarily aimed at preventing speculators having a continuous one way bet, and leaving the RMB 33.5 per cent above its 2005 level. Despite this, the unnamed US official declared "serious concerns" if the RMB did not show "adjustment" - apparent code for allowing its exchange rate to go up. But the trade data show China has been the world's most dynamic market for other countries' exports, while last year the United States made no contribution.

That China is the world's most rapidly expanding market for other countries exports, while US import markets have not regained pre-crisis levels, clearly affects China's promotion of an Asian RCEP, including India, Japan, South Korea, Australia, and ASEAN, and the United States promoting a TPP excluding China.

Regrettably, current US policy has moved away from supporting a multilateral opening of the world economy. Instead, as Philip Stephens of the Financial Times noted accurately:

"China has been the big winner from the open global economy… each of the proposed new [US] agreements would leave China on the sidelines. The exclusion of the world's second-biggest economy is more than a coincidence."

The United States recognizes that a relapse into national scale protectionism, of the post-1929 type, would have dangerous consequences, including for itself, but it has been losing to China’s competition in an open world economy. A way to attempt to limit China is, therefore, to create large trade blocs including the United States rather than a truly multilateral global economy.

But this faces many difficulties. First, US policy dares not risk serious disintegration of world trade - therefore protectionism must be limited in scope. Second, the US is not today a dynamic import market.

Any country tying itself into a trade bloc with the US, to the disadvantage of relations with China, is therefore entering a grouping the centre of which is relatively stagnant in trade terms. Despite political pressure to join, there are definite limits to how much other economies are willing to enter blocs with relatively stagnant trading partners, such as the United States, at the expense of more dynamic ones such as China.

These international trade realities interrelate with domestic political considerations. As global tariffs on manufactured goods are in general already low, the necessary aim of the US is to negotiate advantages in areas where its economy is particularly strong but where international tariffs and other barriers are still significant. Two of the most important of such sectors are agriculture and services. But these are areas of particular sensitivity in numerous countries. For example, in Japan rural areas are the key electoral base of the Liberal Democratic Party (LDP) and this is a key reason protectionism has been maintained in Japan's agricultural trade policy. As the Financial Times noted, Japan's newly signed trade agreement with Australia therefore did not dismantle agricultural trade barriers to the extent the United States wants.

In the United States itself there is significant resistance, particularly in the Democratic Party, to trade concessions in manufacturing and other sectors where developing economies hold competitive advantages. It is therefore difficult for the US to offer proposals making it worthwhile for other countries to accept the domestic political problems that would be created by further opening their economies to the United States in agriculture and services.

Given actual world trade dynamics, China's proposals for widespread trade liberalisation, such as the RCEP, will be more beneficial for other countries' economies than current US protectionist proposals for the TPP. This will undoubtedly influence the course of trade negotiations.